5 Big Problems with the Risk-Based Capital Rule

Wednesday marked the final deadline to submit comment letters on the NCUA’s proposed risk-based capital rule. Credit unions and trade organizations included a host of issues in their comment letters, which they want the agency to address in the final rule. Here’s a look at five of them.

Read more: Define complex …

1. Definition of a complex credit union.

“NAFCU does not believe that NCUA has the legal authority to issue the rule as proposed. There are several areas of the proposed rule where NAFCU questions whether the rule is consistent with the requirements of the Federal Credit Union Act,” said the trade group’s comment letter submitted on Wednesday.

“The proposed rule seeks to establish new more stringent risk-based capital standards for all credit unions with more than $50 million in assets, which NCUA has defined as ‘complex.’ NCUA’s re-definition of a ‘complex’ credit union is outside of the scope of the authority designated to it by Congress,” the letter also said.

NAFCU accused the NCUA of arbitrarily setting the threshold at $50 million in assets with no additional tests to determine if the credit union itself is complex.

Congress could have directed the NCUA to focus only on asset size in defining complex; instead, the Federal Credit Union Act requires the NCUA to consider the complexity of a credit union’s book of assets such as types of investments and loans, as well as liabilities, NAFCU said.

“The definition of ‘complex’ must be based on whether the credit union’s financial activities and operations are sufficiently elaborate to warrant that credit union be designated as ‘complex’ rather than just on its asset size,” NAFCU continued.

Read more: Throw credit unions a capital bone …

2. Supplemental capital not included.

NASCUS said in its comment letter that the NCUA had the authority to include supplemental capital in the rule, but did not.

“NCUA's contention that it lacks the authority to include supplemental capital for the risk-based capital ratio is an unnecessarily narrow reading of the FCUA. That NCUA has chosen to so narrowly construe their legal authority in this instance is puzzling given the agency has taken a generous interpretation of the FCUA both within this rulemaking and in previous rulemakings,” said the state regulator organization’s letter.

“NCUA has chosen to read the applicable provisions broadly for its authority to issue this rule, and it should read the authority to include supplemental capital in the same permissive light. Ultimately, this proposal is designed to bolster the safety and soundness of the credit union system. As NCUA has itself acknowledged, supplemental capital has a role to play in that equation,” NASCUS said.

Read more: More time to comply …

3. Phase-in period should be doubled

CUNA told CU Times on Wednesday before it officially submitted its letter that the group has asked the NCUA to extend the phase-in period for the final risk-based capital rule to minimum of three years. The proposed rule allows for an 18-month compliance window.

Mary Dunn, senior vice president and deputy general counsel at CUNA, said depending on the amount of positive changes the agency makes to the proposal, credit unions may need as much as 5 years to fully implement to the rule.

Carrie Hunt, NAFCU senior vice president of government affairs and general counsel, also told CU Times the phase-in period should be extended to at least 3 years.

Read more: MBLs aren’t that risky …

4. Risk weight for MBLs Too High

“The proposed risk weight for member business loans is unnecessarily high and the concentration buckets do little to address the true source of risk with this type of product,” said NASCUS’s comment letter.

NASCUS continued, saying if NCUA wants to differentiate between MBLs, it should do so by considering the relative risk of the loan provisions and underlying collateral.

“MBLs cover a wide range of products, including any loan over $50,000 that is used for commercial, corporate, agricultural, or business investment purposes. By tying risk weights to the underlying collateral of the loan, the NCUA would capture a more accurate risk-profile of the affected credit unions,” NASCUS said in its letter.

NAFCU shared similar concerns.

“NAFCU urges the NCUA to eliminate the interest rate and concentration risk components of the risk weighting for non-delinquent first mortgage real estate loans, other real estate secured loans, member business loans, and investments,” NAFCU’s comment letter said. “Rather, the NCUA should change those risk weights to be consistent with the risk weighting given to those assets by the FDIC.”

Read more: Trickle down to consumers …

5. Mortgage credit availability

“We are concerned that the proposed rule would unnecessarily hold back mortgage credit to credit union members because the proposal would impose concentration-based risk weights on mortgages which are substantially higher than those imposed on small banks,” said Mortgage Bankers Association, American Land Title Association, National Association of Home Builders and National Association of REALTORS in a joint comment letter.

“We understand the importance of supervising credit unions’ concentration risk, and we strongly support a safe and sound credit union system; however, we encourage the NCUA to follow the lead of other financial services regulators by managing concentration risk at individual credit unions though the examination process, instead of through an across the board rulemaking,” the groups also wrote.

NASCUS urged the NCUA in its letter to abolish the proposed concentration buckets and risk weight all non-delinquent first mortgage real estate loans at 50%.

“In reality, this structure could increase risk in the system by encouraging credit unions to swap out first mortgages for riskier investments that they may not have the necessary expertise to manage properly,” said the letter from NASCUS to the NCUA.